Millennial Traders Are Making Risky Bets — Here's Why

Ease of access to the stock market has led many new and young traders to capitalize on volatility and slashed fees, as risky assets and trading activities have seen volumes spike.

That's the big takeaway from a recent E-Trade study, which found that more than half of investors younger than 34 (51%) say their risk tolerance has increased since the coronavirus outbreak. That's 23 percentage points higher than the total population.

The Findings

• Over one in three investors (34%) said they're moving out of cash and into new positions — 15 percentage points higher than the total population.
• Over half of investors (51%) under the age of 34 said they are trading equities and 46% said they’re trading derivatives more frequently, compared to 30% and 22% of the total population, respectively.
• 9% of young investors said their investment portfolios have recovered since the beginning of the pandemic
• 50% think a recovery will happen in the next six months, compared to 33% of the total population
• Personal health (58%) and investment portfolio (53%) concerns remain the top worries for young investors

To gain some perspective on how this increase in risky trades is impacting the markets, both positively and negatively, Benzinga spoke with DayTraderPro founder Guy Gentile. Here's what he had to say.

BZ: What surprised you about the E-Trade study?

Gentile: Nothing actually surprised me about the E-Trade study. Right now, we’re in a massive bull market, ever since the bottom in March, and buying just brings more buying. There’s the [federal stimulus] checks that went out, and there are states that are paying stimulus checks as well.

For example, my niece is making much more money not working, than if she were going to work. So, she’s interested in investing in the stock market. Millennials are looking at platforms like Robinhood and E-Trade because they want to know where to go and invest their money. They’re just seeing stocks going up and buying brings more buying.

The higher it goes, the more people are talking about it. It kind of reminds me of the Bitcoin craze, where everyone was talking about Bitcoin, and people that had never invested in anything ever before — not even in stocks — were buying bitcoin. So, we’re in that same type of environment. 

Are millennials more likely to invest in cannabis companies?

Absolutely. The reality is, if you’re a user of the product, which I would say there are more millennials users of this product, you’re more likely to invest in it. Also, it is something trendy and something still kind of rebellious, and that is going to attract millennials.

What's considered a risky investment or trade?

Pretty much anything at this point that has gone parabolic is extremely risky. What is not risky is value investing — dividend investing. I think that’s where the money is going to rotate into once there's a top reached in this massive run up that we’ve had.

Will there be a pullback?

Eventually, we’re going to run out of money to continue to buy these stocks higher and there’s going to have to be a pullback. Pretty much, every single stock that is up over 100% since January is extremely risky because I can’t say we’re necessarily in a better position. Some of these companies have made more money since January.

An example of that is something like Amazon.com Inc. AMZN, which has definitely benefited with all the retailers that have gone out of business. Amazon might hold their value a little bit better than something like Tesla Inc. TSLA that hasn’t had any significant growth since January.

There’s going to be buying and buying and buying until there’s no money left to throw at these stocks. It should come up pretty soon, granted if they throw another stimulus round at the economy — that’s probably going to keep it going. Most stocks actually have not gone up that much. The market just looks to have gone up because there are a select few stocks — Amazon, Apple, Tesla — that have just gone up an insane amount due to COVID plays.

How is this increase in risky trades impacting the market?

Very simple: the market just continues to go higher and higher because they’re just making speculative bets. The problem is this: when you buy a stock that’s up 100% or 1000%, and you’re hoping it’s going to go higher, there needs to be another “sucker” that is going to buy it at an even higher price. (I call them suckers because they’re buying at these over-inflated values.

If you look at the short interest on many of these stocks, it’s been squeezed down to nothing. There’s not going to be that much forced buying from short squeezes anymore. The only thing left is basically the buying that is going to come from retail. Once they run out of bullets to buy, the shorts come in and a real seller comes into the market, many of these stocks are going to get cut in half and it's going to happen so fast that these retail traders are not going to know what to do. Some of them will average in with margin and lose 100% of their account value when these stocks decline in value. I’ve seen it happen before, and history repeats itself.

We’re in that phase, like the dot-com and Bitcoin type bubble, with some of these stocks — including Apple Inc. AAPL. Apple is a massive company, but take a look at its revenue a year ago compared to right now. A year ago, they were worth $1 trillion. So, why is it that seven to eight months later, they’re worth $2 trillion? What happened that they’re worth that much? They’re sitting on a lot of cash, [but] their cash is worth less, since the dollar is dropping. It's a big bubble of people just throwing their money into a certain few stocks.